This post may contain affiliate links, which means I may earn a small commission if you make a purchase through them — at no extra cost to you. I only share products and tools I truly love and recommend!

If you’re in the very early stages of planning & opening your very own boutique business, one of the decisions you’ll have to make is what business entity structure you want to operate as.

Choosing a business entity structure means choosing whether you want to operate as a sole proprietorship, partnership, LLC, or Corporation, or really, even a combination of them. 

So, how do you even decide which is best for you? You’ll want to consider the following things when deciding which business entity structure is best for your retail business.

Quick note – all of this is general in nature, and not to be taken as actual legal or tax advice. If you need help deciding what is best for your specific business needs, always consult with your own Attorney and/or Accountant.

Which business entity structure CAN you even use?

If you are starting up a brand-new business and you are the sole owner of that business, then you’ll have the opportunity to choose to operate as a sole proprietorship or as a limited liability company (LLC).

If you are going into business with one or more OTHER individuals, you can choose to operate as a partnership, or some version of a limited liability partnership (LLP). There’s a few different options when it comes to LLPs, so I’m going to leave that conversation to an actual attorney.

You CANNOT operate as a sole proprietor if you are going into business with another individual. Some states do allow an exception if it’s a husband & wife team that owns a business, but please consult with a local attorney in your home state to determine if this applies to you. 

And while you can also choose to create a corporation as your business entity, it is often WAY more complex to setup & maintain for a small business, so I’m not even going to go into that right now. But, I will bring the special S Corp tax status into the conversation a little later, so keep reading!

Which business entity structure is the best for your legal protection?

The plain and simple version – a sole proprietorship or partnership doesn’t really offer any form of legal protection. So, if someone sues your “business” – that means they’re suing you. There is no protection in place to separate the business from the personal.

On the flip side, if you operate as an LLC or LLP, your business will be recognized as something that is completely separate from yourself as an individual, and the business will be solely responsible for any liabilities in the business name. 

With this in mind, you will need to do a little more paperwork when you setup your business to actually PROVE that the business is completely separate from yourself. Things like creating an Operating Agreement, Articles of Organization, Annual meeting minutes (yes, you need to have a meeting with yourself…and document it), and opening separate business & credit card accounts. 

Yes, it’s a few extra steps, and I highly recommend working with a local lawyer to help you get all of this set up correctly. But, the legal protection is well worth it, in my opinion.

Which business entity structure is the best when it comes to taxes?

When setting up a new business, if you are choosing between a Sole Proprietorship or an LLC, there is actually no difference in the way these two types of entities are taxed. There MAY be certain “taxes” imposed on a state level for LLCs (*ahem* California), but as far as income taxes go, there is no difference. All income & expenses are reported with all your other personal income on a Schedule C. 

If you operate as a partnership (general partnership, LLP, or any of the other types of partnership), you WILL need to file a separate tax return for your business, and that return is due by MARCH 15th. This return will report all your income & expenses for the business, along with each partner’s share of that income & expenses (i.e. 50/50 ownership, or otherwise). The business will not owe any tax, but instead, the partners will each use the information provided on their business return to file their own individual income tax returns. The individual owners may then need to pay any taxes on the business profits.

As your business begins to grow, one of the biggest tax benefits you can find is electing to be TAXED as an S Corporation (S Corp). This election allows you to limit the amount of self-employment tax (which you will be paying on your personal income tax return), and should definitely be considered once you reach about $80,000 in net PROFIT (bottom line) in your business. But, this election can be made later on in your business, and is typically not recommended for a new start-up business.

My recommended business entity structure

I always recommend that a business takes advantage of the legal protection that a limited liability company (if you’re the only owner), or a limited liability partnership (if you own it with someone else) can provide. It’s like insurance – you never plan to get in a car accident or have a house fire, but if the day comes when you need it, you’re sure going to be glad that protection is there.

Once your business gets to a place where you’re earning $80,000 in net PROFIT a year (maybe more if you’re a partnership), then consider reaching out to a tax pro to have them help you evaluate if you can benefit from electing to be taxed as an S Corporation. 

If you still need some help deciding between a Sole Proprietorship vs an LLC for your business, then check out this YouTube video by Attorney Aiden Durham of All Up In Yo’ Business. She talks through some of the pros and cons that may help you decide what’s best for your business.

How does this relate to my bookkeeping?

You didn’t think I was going to leave your bookkeeping out of the conversion, did you?? Here’s the good news, there really is no major difference to your bookkeeping, no matter what type of entity you choose. If you are a partnership, there will be small differences in how you need to track certain things like partner contributions, partner distributions, and guaranteed payments to partners. But, if you’re just choosing between a sole proprietor and LLC, there is no difference!

You do NOT need an LLC in order to deduct your business expenses, and you DO need to be reporting your total income no matter what entity type you’ve selected. 

If you need help getting your own bookkeeping setup, and some step by step instructions on how to master it all with CONFIDENCE, then check out Bookkeeping Made Simple for Boutiques.

If you've got any questions or worries about forming an LLC, managing your bookkeeping, or deciphering taxes, just shout – I'm here for you!